What is Convergence and Divergence?
During an upward trend, when desire or tendency for more Buy orders is decreasing and market has been saturated from Buy orders, despite of probable further upward movement, a reversal point is going to appear. This is called Divergence.
On the other hand, if on a downward trend, tendency to place more Sell orders is diminishing then a reversal point toward top will appear, known as convergence.
Traders can detect it by utilizing significant indicators and oscillator such as Stochastic, RSI, AO and MACD to monitor whether overbought or oversold conditions have happened.
Traders can find out three situations; little supporting trades on current trend are being ordered, most supporting trades are being closed or a lot of trades in opposition to the current trend are ordered.
Each one of those cases may have different rate of influence on trend direction, however, all of them indicates that current market trend is saturated and a reversal price, appropriate for entry price of an order, is going to appear.
While RSI demonstrates overbought or oversold conditions by comparing magnitude of recent gains to recent losses within a period of time, Stochastic helps traders by considering the current close price against Highest or Lowest price in current trend.